the race for size, 1870–1960 - hoover institution · tions, thus giving birth to giants like...

Hoover Press : Rosa/Century hrostc ch1 Mp_9 rev1 page 9

CHAPTER 1

The Racefor Size,

1870–1960

The first twentieth century initiates a sharp turnaround from all

previous trends. Democratization, free trade, relative peace and small-

scale wars, the European balance of powers and the Enlightenment’s

philosophy of progress are supplanted by imperialism and total war,

economic protectionism, state control, a radical rejection of the mar-

ket, and political totalitarianism. The civilization begot by the scien-

tific, economic and cultural revolution of the eighteenth century takes

a dramatic leap backwards.

The Great Cycle starts with the size expansion of all organizations,

economic as well as political. Gradually, business firms turn into giant

corporations—at least compared to what they were before—while

states compete with each other to form the largest colonial empire

and, internally, control a growing share of their domestic economy.

Centralization, gigantism, bureaucracy and standardization de-

velop simultaneously in corporations, in the state’s organization and

politics, and in social and cultural matters. Hence the peculiar style

which defines the new century: it is the era of hierarchy, command

economy, mass meetings and war economy. It is the Iron Age of

reactionary autocracy. The large bureaucratic organization wields a

Hoover Press : Rosa/Century hrostc ch1 Mp_10_rev1_page 10

10 The Organizational Cycle

competitive advantage over smaller structures and favors authoritarian

and centralizing social and cultural doctrines.

This first phase is characterized by a reinforcement of centraliza-

tion and command power, reduced economic, political and intellec-

tual freedom, and it defines the general tone of this Iron Age. Un-

deniably, Stalin was well inspired to choose a pseudonym meaning

“steel” in Russian.

The industrial and administrative revolution marked the advent

of big firms, while states became addicted to imperialism and dirig-

isme. Taken to extremes, these new organizational structures result in

totalitarianism, the ultimate stage of centralization, and bring about

the very particular moral atmosphere of the hierarchical society.

THE SECOND INDUSTRIAL REVOLUTION AND THEEMERGENCE OF THE LARGE CORPORATION

At the beginning of the century, the big issue, as suggested by Lenin

in The State and The Revolution,1 was to transform the whole society

into a single firm and a huge factory. This view is shared in a more

limited way by Joseph Schumpeter, a former Finance minister and

Austrian economist living in the U.S. According to him, private cap-

italism inevitably turns into socialism given that big companies are

more efficient and innovative, and thus concentration is unavoidable.

But are very big firms and centralized states essential to secure pros-

perity? And is it really possible to centralize a whole society just like

a big corporation?

The end of the century vindicates the superiority of decentrali-

zation celebrated by Ronald Coase and Friedrich Hayek as well as,

recently, the new internauts. But it only occurred after seventy years

of centralization during which the hierarchical and centralized orga-

nization advocated by Ford, Stalin and Hitler was gradually considered

1. International Publishers, undated, p. 84.


11The Race for Size, 1870–1960

as the solution to the society’s problems. This revolution is not only

political and Russian. It concerns all countries and organizations.

It results from changes to the structure of the commercial and

craft society of the late nineteenth century. According to economist

Kenneth E. Boulding, it “was mostly a consequence of communicative

advances (telephone, telegraph, typewriter, photocopier) and possibly

of a strengthening of the managerial structure. All these changes took

place in the 1870s and enabled an enormous expansion of organiza-

tions, thus giving birth to giants like General Motors, the U.S. de-

partment of defense and the Soviet Union, as well as many institutions

which were inconceivable before 1870.”2

Adam Smith’s invisible hand, governing trade between individuals

on free markets, was thus replaced by Alfred Chandler’s “visible

hand,”3 that is, the centralized and bureaucratic handling of human

affairs. This managerial hand governed the big business companies

which first appeared in transportation before spreading to all the other

sectors. Bureaucracy replaced both the market and the autarkic farm-

ing methods of the pre-industrial system.

The real organizational novelty was to apply to these newly-born

business and industrial companies the methods that were until then

only used by the state and church to manage things and human be-

ings—but not without substantial improvements. This is the admin-

istrative innovation that had been foreseen by Auguste Comte and

Saint-Simon, and whose contents were later analyzed by Max Weber.

This is a totally new phenomenon. The First Industrial Revolu-

tion—usually dated 1780–1860—took place in societies where firms

were only small craft undertakings. This revolution was “more than

2. Kenneth E. Boulding, “Economics as a Not Very Biological Science,” in Tho-mas Wiegele (ed.), Biology and the Social Sciences: An Emerging Revolution, WestviewPress, 1982.

3. Alfred Chandler, The Visible Hand, The Managerial Revolution in AmericanBusiness, Belknap Press, 1977.



industrial”4 in the sense that it also had repercussions on family, re-

ligion and politics.

More than a time of industrial expansion, this was the true birth

of factories and companies. Until then, there were hardly more than

1,800 firms or so-called commercial and financial “houses” in Great

Britain and production took place at home and mostly in the country.

But it is in fact the second wave of technological breakthroughs,

the Second Industrial Revolution, that lays the durable foundations of

the twentieth century. Although it is built on the same determinants

that gave birth to factories and manufactures, the second revolution

radically amplified the new organizational advances. Centralization ac-

celerated, hierarchical structures deepened and the workforce soared,

while the managerial staff increased sharply in order to control grow-

ing production flows. And as markets expanded rapidly, their own

growth simultaneously determined a huge development of private bu-

reaucratic pyramids.

To understand the causes of this transformation, it is necessary

to explain why factories supplanted industrial subcontracting, espe-

cially as it is the same centralizing factors that transformed with an

increased intensity both business firms and public administrations

during the Second Industrial Revolution.

The Birth of the Corporation

Before 1750, there was no clear distinction between the company and

the family.5 Since the invention of farming in the Neolithic age, the

4. As pointed out by Joel Mokyr in his foreword and his article “Are We Livingin the Middle of an Industrial Revolution?” Federal Reserve Bank of Kansas City,Economic Review, second quarter, 1997.

5. This date also marks the beginning of the “world frontier” phenomenon: thelarge expansion of European people gradually caused the extinction of many civili-zations on other continents, due to more sophisticated arms, but also to the spreadingof infectious diseases to which native people were not immune. William H. McNeill,The Global Condition, Conquerors, Catastrophes, and Community, Princeton UniversityPress, 1992.



family cell had remained the basic framework of production in all

societies. Companies often consisted of a tradesman who subcon-

tracted work to home workers or to independent craftsmen who

worked in their own workshop and sold their products on markets

or in small shops. During the first half of the eighteenth century, the

production of cotton fabrics was the first major non-farm activity. It

was usually organized on a small scale and financed by tradesmen/

manufacturers, who subcontracted the spinning and weaving of raw

cotton to farmers/workers working at home. The production unit was

thus very small and based on family work. Spinning wheels and weav-

ing shuttles provided work for a couple and its children. Some trades-

men had thus thousands of people under them and owned hundreds

of weaving looms scattered in the country without directly supervising

everyone’s work. Besides, the equipment investment per worker re-

mained very low.

Admittedly, there were already large joint-stock companies before

the Industrial Revolution. A good example is the companies in charge

of overseas trade in the United Kingdom or big pre-industrial firms

such as Chatham’s naval dockyard or London’s Whitbread brewery.

Joint-stock companies had already been quite successful in France in

Law’s time but the great commercial or manufacturing units belonged

to the state, like for instance the royal manufactures, the naval dock-

yards and the big naval trading corporations. Before the mid-nine-

teenth century, the largest organizations were the first bureaucratic

state bodies. In the Caribbean Islands and in America, the great sugar

or cotton-growing slave plantations had a rather impressive labor

force, which was subjected to an extremely tight control that fore-

shadowed totalitarian systems.

As Leslie Hannah noted:

Although there were big-sized firms before the beginning of theindustrial revolution, it was the introduction of new mechanicaltechniques and the application of the steam machine to the indus-trial process which, from the late 18th century, radically transformed



the nature of the capitalist company and created an economy wherefactories employing hundreds (and sometimes thousands) of work-ers became the standard form of production units.6

It is only during the Industrial Revolution that all the workers

started being concentrated in a same factory, the English “mills” which

were referred to as “satanic mills” in the Socialist literature of the

time. This new organization of work was made possible by falling

transportation costs, economies of scale thanks to the development of

centralized energy sources and innovations such as the introduction

of gaslight in cities which enabled longer work in winter.

But this revolution was mainly due to the use of new and cheaper

energy sources, such as coal and steam power. This changed radically

the production process and made transportation much easier with its

introduction in the shipping, and especially, the railway industries.

Szostak suggests that the changes in transportation techniques and

means, especially in Great Britain, during the decades that preceded

the First Industrial Revolution were the decisive causal factor.7 At the

time, various legal initiatives were undertaken to create shipping cor-

porations, lease the construction of toll roads and build or renovate

canals. At the dawn of the Industrial Revolution, Great Britain—al-

ready favored by its geographical advantage—had the best waterway

and road network in the world. It followed that transportation became

cheaper and quicker for goods and passengers and the domestic mar-

ket became more united as it was given a new national dimension.8

The growing markets generated by this transport revolution in

turn led to an organizational revolution. Indeed, the substantial in-

6. The Rise of the Corporate Economy, Methuen, 1976, p. 8.7. “The Organization of Work: The Emergence of the Factory Revisited,” Journal

of Economic Behavior and Organization, 11, 1989, pp. 343–358.8. Quoting several specialists, Szostak noticed a few elements of interest. For

instance, from 130 hours in 1660, the travel time for the journey from Manchesterto London fell to 60 hours in 1760 and only 25 in 1785. Following the digging ofnew canals and rivers (especially the Bridgewater Canal), the price of coal fell by halfin the late eighteenth century in Manchester and Birmingham.



crease of the trade of goods and commodities soon determined major

changes. To solve the control and organizational crises caused by these

suddenly amplified flows, administrative centralization was under-

taken. This very ancient technique, first used in ancient Egypt and

Mesopotamia during the agricultural revolution in the beginning of

structured societies, proved a much better way to deal with mass pro-

duction than geographically dispersed subcontracting.

Factories reduced substantially transportation needs as they

avoided the first stage in the production process, which consisted of

fetching the goods at the subcontractor’s workshop before delivering

them to the client. Instead of spending his time on the road as a

traveling salesman, the company head could focus on organizing pro-

duction and supervising its employees with the help of permanent

executives. As a consequence, productivity and the work pace in-

creased, while cheating and petty theft decreased. Stocks of commod-

ities and goods could now be reduced, while costly machines and tools

could be used almost continuously, thus improving depreciation and

allowing an increase in investment. Employees could get about more

easily. They came from farther away and ate for cheaper at lunchtime

as food transportation costs decreased.

It is in the cotton-oriented textile industry that the old workshops

were first transformed into modern, highly-mechanized, capital inten-

sive factories and firms. With several innovations in the cotton pro-

duction processes, and later on the use of steam machines, it became

crucial to control more tightly the workers and centralize production.

This was the only way to benefit fully from the economies of scale

resulting from the use of modern equipment and steam engines.9

As soon as 1784, Sir Robert Peel’s Bury-based calico company

employed 7,000 people. However, the average textile firm used to em-

ploy a few hundred only. Indeed, in 1822, textile companies in Man-

chester were composed of 100 to 200 workers with a capital of 50 to

9. Leslie Hannah, op. cit., p. 9.



90 pounds per employee, that is 5,000 to 18,000 pounds per firm. But

in the 1830s this amount rose to 80,000 pounds, reflecting the sharp

increase in the capital intensity of the new fabrics.

However, faced with the consumption boom, companies first

multiplied instead of increasing their size as the efficient size of each

firm was probably strictly limited. The integration of production

within factories eventually started in the 1820s and 1830s, but factories

were still rather small-sized.

Although the centralization of production units early in the nine-

teenth century was an organizational revolution, we must keep in

mind that the number of employees per company was still much lower

than nowadays. The “Representative Firm” mentioned by Alfred Mar-

shall, whose celebrated Principles of Economics was the reference text

in economics at the beginning of the twentieth century, was still closer

to what we would now call a small- or medium-sized company.

But industrial concentration accelerated sharply during the second

half of the nineteenth century and paved the way for the radical

changes of the first twentieth century.

Mass Production, Distribution and Consumption

While firms were born in Great Britain during the 1780–1860 Indus-

trial Revolution, the large modern corporation first appeared in the

United States during the Second Industrial Revolution, the era of mass

production, distribution and consumption. According to Alfred Chan-

dler’s reference study, the advent of big firms took place in the U.S.

during the 1840–1920 period, when the existing farm economy was

replaced by a mostly urban and industrial economy.

Factory production only really took off when coal became avail-

able in large quantities in the mid-1830s, as the United States lagged

behind Great Britain from this point of view.10 With the availability

10. The only exception was the textile industry which had been a precursor as theequipment and production were concentrated in a single place: the fabric or the



of coal and steam power, the whole production process changed. It

became possible to use new machines, develop the steel industry and

build railways. This created a need not only for rails, wheels, me-

chanical parts but also glass, leather work and rubber. Thanks to cheap

energy and heating and new fast, high-capacity transportation means,

factories spread in the 1840s and 1850s.

In the mid-1840s, the price of coal fell from 10 to 3 dollars a ton.

The railway network spread to all eastern states. Transit and travel

became 3 to 10 times faster within a decade, while for centuries the

speed of transportation had depended on draft animals’ walking pace.

Steam-powered railways supplanted river and sea transportation and

this increased even more the volumes transported, as railways could

be used all year long unlike canals which were impassable in winter

and in times of flood.

Coping with Faster Production Flows

Factories’ turnovers rose substantially as the harnessing of energy also

enabled the industry to mass produce at unprecedented rates. And

this mass production could be distributed to a great number of remote

markets through the railway network. The industrial process’s overall

speed increased significantly.

The organization of the production process and the architecture

of the capitalist system were transformed by the acceleration of pro-

duction flows. This is the central insight of Chandler, who viewed this

mutation as the origin of the “administrative revolution,” which drove

the most industrialized countries into the first twentieth century, some

three decades before 1900. This analysis was taken up and completed

by James Beniger in a remarkable review of what he calls the “control

revolution.”11

factory like in Great Britain. At that time, manufacturing activity was mainly ruraland seasonal. Workers were recruited when necessary among the people of the localfarms and were paid either in kind or with money.

11. James R. Beniger, The Control Revolution, Harvard University Press, 1986.



Since the beginning of human history, the speed of transportation

of material goods had always depended on draft animals’ walking pace

or on wind speed. But suddenly, within a few decades, these standards

became obsolete as everything accelerated. Production increased sub-

stantially in the factories and was sent across the world from one

continent to another. For the first time ever, production flows almost

exceeded the human capacity of control. This is why in the mid-

nineteenth century some companies were faced with a control crisis

which then spread to the whole U.S. material economy during the

following decades.

At that time, the society lacked the technical and organizational

means to manage flows that big and quick. These required constant,

abundant and very precise information. Such a degree of coordination

had never been seen before, except maybe during the Napoleonic

Wars, after the French Revolution of 1789 which had resorted to mass

conscription and tremendous execution speed in military matters. As

specialists often underline, war is basically a question of logistics and

this is exactly the kind of problem the big firms of the New Industrial

Revolution suddenly had to tackle.

The Control Crisis and the Resurgence of Bureaucracy

The control crisis first materialized in the form of big railway safety

problems. Then, it spread to the distribution of goods through the

new and complex transportation and warehouse network, and even-

tually to the production process itself as speed often caused technical

accidents and administrative backlogs.

Logically, the first response to this crisis was to develop new in-

formation systems, given information is always necessary to transform

energy and materials into products. But more importantly, the answer

came from the development of bureaucracy, which had been invented

at the dawn of our civilization precisely to control and coordinate the

agricultural production boom three to four millennia BC.



As the control crisis spread through the material economy from the1840s to the 1880s, it inspired a continuing stream of innovationsthat enhanced information processing, administrative methods andcommunications. [. . .] These permanent innovations in transpor-tation, production, distribution and mass marketing reached theirheight in the 1870s and 1880s; on the eve of the new century, thecrisis had been substantially resolved.”12

These modernized bureaucratic methods allowed producers to

deal with mass markets, the major economic breakthrough that re-

sulted from the first two industrial revolutions. And this bureaucratic

solution to the control problem which overwhelmed not only the

United States but also Great Britain, France and Germany came to

dominate all the evolutions of the first twentieth century.

World War II would bring in a bundle of non-bureaucratic (if

not anti-bureaucratic) new control techniques but we will detail them

later on. For the time being (in the late nineteenth century), the large

bureaucratic firm is still the best way to control mass production.

According to many historians, these new management methods were

born from war, and notably during World War I. But in fact, they

date essentially from the mid-nineteenth century and were first in-

tended for managing U.S. railways, which played a major role during

the industrial revolution.

This example is very instructive in terms of the solutions found.

On the first high-speed single-track two-way railroads, traffic man-

agement was necessary but difficult in the absence of control tech-

niques, centralized communications, telegraphs, standardized proce-

dures, coded signals, precise timetables, and synchronized chronom-

eters aboard the trains. Serious accidents were frequent and generally

resulted from head-on collisions between two trains on a single line.

Obviously, the best solution to avoid those organizational and com-

munication problems was centralized planning. In other words, all the

traffic had to be managed by a single company.

12. Ibid., p. 220.



The Springfield, Massachusetts-based Western Railroad Corpora-

tion decided to reorganize its bureaucracy, planning, data processing

and communications. As Alfred Chandler pointed out, this was the

first time ever that a U.S. company took the time to draw precisely

its organizational structure as a single systemized chain of command

represented by organizational charts.13

All the necessary bureaucratic procedures were then defined: pre-

fixed rules, distribution of tasks and responsibilities, work planning,

systematic information collection and hierarchical reporting, control

with feedback, use of the telegraph to announce the traffic expected

and timetable changes, employees in uniforms mentioning their exact

position, organizational charts, coded signals, and collection of nor-

malized statistics.

These were the elements of the rational administrative control

theory that Frederick Taylor and others called “Scientific Manage-

ment” in the 1890s. Chandler then renamed it the “managerial rev-

olution,” but in fact James Burnham was the first to use this term in

the title of his book published in 1941.

This was not the only industrial sector that was affected by the

acceleration of production flows. As distribution speed had improved,

companies were tempted to increase the rate of production. For ex-

ample, in the 1890s, a single blast furnace could produce 1,000 tons

per week instead of only 60 in the late 1860s. Obviously, this required

some synchronization and coordination of many operations and the

production rate had to be adapted to the capacity and frequency of

the railroad freight.

For all the production processes composed of a great number of

successive stages, it became necessary to integrate them vertically

within a single firm to achieve centralized coordination. This method

was applied to sewing machines in the 1850s, repeating guns in the

13. Chandler, op. cit., p. 97, quoting Stephen Salsbury’s monograph, The State,the Investor, and the Railroad: The Boston and Albany, 1825–1867, Harvard UniversityPress, 1967, p. 187.



1860s, typewriters in the 1870s, electric motors in the 1880s, and even-

tually the first U.S. cars in the 1890s.

Similarly, in the agricultural distribution sector, vertical integra-

tion was undertaken and organized markets developed to simplify the

transportation of farm produces from the hundreds of thousands of

producers to the thousands of stores. This resulted in the introduction

of new forms of organization, wholesalers, department stores and con-

cepts such as marketing, advertising and trademarks.

All in all, it seems that mass production and mass distribution

were inexorably leading to an administrative revolution.

The Administrative Revolution

Middle managers were given the responsibility for the coordination

of these rapidly-growing production flows and this required the de-

velopment of more accurate accounting methods. Bureaucratic control

is performed by an army of executive supervisors who never work on

the actual production but manage, measure and coordinate the pro-

duction and behavior of the field workers, who really make finished

products out of raw materials. Such an administrative and hierarchical

superstructure governs the production-process employees. This busi-

ness administration is the precise reflection of the state administra-

tions set by the European monarchies during the seventeenth and

eighteenth centuries, but with much more modern technical capaci-

ties.

This revolution was accompanied by an impressive number of

innovations—many of which are now common use: the mass pro-

duction of mail envelopes (1839), precise organizational charts and

the first business school (1842), the first shorthand magazine (1848),

the hierarchical data collection and processing system in railway com-

panies (1853), the use of blotting paper instead of sand to mop up

damp ink (1856), the first distinction between workers and executives

in companies according to the line-and-staff concept (1857), the first



telegraph ticker that gave prices in continuous time in a brokerage

firm (1867), the first patented typewriter (1868), the first automatic

filing system for hospital patients (1874), the first modern offices with

forms, filing cabinets, telephone books and telephones (1880s), the

first collegiate business school (Wharton in 1881), the first accounting

firm (1883), the first patented dictating machine (1885), the first busi-

ness calculator with a keyboard (Comptometer in 1887) and the first

card tabulator (the Hollerith system in 1889).14

It is against this background of continuous innovation in admin-

istrative techniques that Frederick Winslow Taylor started working for

Midvale Steel, where he was about to rationalize the ordering system

and establish standard times for each element of specialized workers’

work. There, he developed his original concept of “scientific manage-

ment” which not only improved the processing of material flows by

using standardized spare parts and coordinating operations, but also

formalized human behaviors in order to integrate the whole company

into a unified product transformation process.

As he points out tellingly in Principles of Scientific Management

(1911), “In the past the man has been first; in the future the system

must be first.” And this is a brief but striking description of the prin-

ciple that ruled the organization of totalitarian systems for whole so-

cieties a few years later.

This move continued in the early twentieth century when Henry

Ford built the Highland Park Plant in 1913 to produce the Model T.

This marked the beginning of the moving assembly line, which was

inspired by the continuous flows in oil refineries. The idea is to make

the car assembly process as smooth as possible in order to maximize

productivity and avoid dead times and pressure surges that prevent

liquids from flowing in pipes. He thus took to their extremes these

new concepts, the spare part technique and the idea of standardizing

products and work.

14. Beniger, op. cit., pp. 282–283.



Other industries had already adopted these principles looking for

greater productivity through the mechanization of all work-stages, as

for example Gustavus Swift’s meat-packing and -cutting line in Chi-

cago in the 1880s.

In turn, the generalization of factory mass production led to a

wave of technical innovations that improved the automation of the

production control process during the first decades of the century,

just like the development of manufactures during the first Industrial

Revolution had resulted in the invention of new and costly machines

that modern “mills” could easily amortize.

The control of these rapidly-growing flows was thus achieved by

the centralization of several production activities under a common

authority, that is the integration of these various processes into a single

big organization. As we will see in the second part of the book, cou-

pled with the latest technological advances, centralized organization

was a good way to collect and concentrate the costly information

necessary to control fast-increasing flows and make the best of it—

which was impossible with existing decentralized procedures. It also

enabled amortization of the data collection and processing costs re-

sulting from indivisible and costly investments over a large number

of units produced and sold.

And it is the economies provided by this centralized administra-

tive process that contributed to the success of ever-larger companies.

As administrative management capacity improved, private and public

administrations grew bigger.

A New Capacity to Manage Large Organizations

The production of the information necessary to the control of the

rapidly-growing flows resulted in the vertical integration of the suc-

cessive stages of the production process, starting with the extraction

of raw materials and ending with the retail sale of finished products,

but also in the geographical integration of the factories producing the



same goods for regional clienteles, and consequently, in a general in-

crease in companies’ size.

Hence the strong growth of production units during the second

half of the century from 1860 to 1890. Over that period, companies

became multi-unit business enterprises both to deal with the market

expansion generated by transportation innovations and to increase the

vertical integration of all the production-process stages, from the ex-

traction of raw materials to marketing and distribution. With these

developments, end-of-the-century firms gained a much bigger dimen-

sion.

The traditional enterprise was a single unit belonging to an in-

dividual or a small number of owners operating out of a single office

their trade, factory, bank or transportation business. These enterprises

had only one economic purpose and dealt in a single product line or

service within a single geographic area. Thus, before the birth of the

modern firm, the activities of these single unit enterprises were co-

ordinated and monitored directly by the market reactions.15

The business head, which was often the only owner, directed and

supervised by himself a small number of workers, journeymen or ap-

prentices with little administrative support and, consequently, no

work supervisors. Only a few of these companies employed directors

with responsibilities similar to those of middle managers in modern

firms. But there was no stratified administration where top executives

supervised the work of middle executives who in turn superintended

field workers.16

In contrast, the modern business enterprise is managed by a vast

hierarchy of salaried executives and generally composed of several pro-

duction units geographically spread. Each is specialized in a particular

field and produces a wide range of goods and services. As they are

commonly owned, the trade between them is internalized and they

15. Chandler, op. cit., p. 3.16. Ibid., p. 3.



are not subjected to market and price mechanism. Decision-making

and control are performed by the owner’s salaried executives. Such

an administrative structure of middle and top executives had never

been seen before.

Bureaucracies: Public and Private

On the eve of World War I, modern firms had become the dominant

institutions in many sectors of the U.S. economy. By the mid-century,

they employed hundreds to thousands of middle-management and

top executives to supervise the work of tens to hundreds of production

units with up to several hundred thousands workers. Such a quick

and major institutional change achieved in so short a period had no

historical precedent.

This is in deep contrast with the early nineteenth century organ-

izational methods on both the political and economic fronts. As late

as the 1830s, for example, the Bank of the United States, then the

nation’s largest and most complex institution with twenty-two branch

offices and profits fifty times those of the largest mercantile house,

was managed by just three people: Nicholas Biddle and two assis-

tants.17 And President Andrew Jackson and 665 other civilians ran all

three branches of the federal government in Washington.

At the end of the period, bureaucracy had spread to all human

activities, but it had a bad reputation as several perceptive observers

underlined. As early as 1837, John Stuart Mill wrote, for example, of

a “vast network of administrative tyranny . . . that system of bureauc-

racy, which leaves no free agent in all France, except the man at Paris

who pulls the wires.”18 And Thomas Carlyle, in his Latter-Day Pam-

17. Fritz Redlich, 1951, The Molding of American Banking, Men and Ideas, pp.113–124, quoted by Beniger.

18. R. W. Burchfield (ed.), A supplement to the Oxford English Dictionary, OxfordUniversity Press, 1972, p. 391, quoted by Beniger.



phlets, published in 1850, complained of “the Continental nuisance

called ‘Bureaucracy.’”

But it is Max Weber who first theorized bureaucracy in Economy

and Society (1922), defining its main characteristics as follows: dehu-

manization of the information processed (“cases” and “files”); for-

malized and predefined rules to make decisions, answer questions and

solve problems; well-defined tasks and duties; high division of labor;

hierarchical authority system and separated decision-making and

communication functions. The stability of the system was purportedly

reinforced by the practice of regular promotion based upon seniority.

The mechanism is mainly based on the possibility to “rationalize”

work, a term by which Weber meant the reduction of the volume of

information processed by removing or ignoring the data that are not

absolutely necessary to manage the process. Never mind if the exec-

utives or workers like sport or art. What really matters is their expe-

rience, position in the hierarchy, how quickly they process files and

the number of mistakes they make for each hundred files processed.

When applied to people, bureaucratic mechanization explains the

widespread use of administrative forms, which reduce people to a

handful of precise characteristics: civil status, occupation, curriculum

and a few others depending on the organization’s needs. This deper-

sonalizing approach neglects everything that is original, particular,

specific, indescribable or unclassifiable. But when people are not re-

duced to mere standardized objects, big human groups become almost

uncontrollable with the existing knowledge and technologies.

The same organizational concerns and principles of the Ford and

General Motors factories, the Napoleonic army, and the Swift meat-

packing company in Chicago were then adopted by the mass parties

(Nazis and Communists) in the ’30s and the state bureaucracies man-

aging industrial sectors, general education or the whole national pro-

duction. The problems had not changed and neither had the few rem-

edies.

However, these global organizational changes were only noticed



much later with the usual lag between perception and understanding

and the evolving realities which accompanies every transformation or

revolution. Economists continued to analyze production almost only

in terms of markets and prices, considering the business enterprise as

if it was a single isolated person or a craftsman without taking into

account its internal organization and administrative methods for re-

source allocation. Strangely, the business enterprise as an organization

was not mentioned in economics textbooks and was thus nonexistent

in theory.

And yet, there were many proofs of the new role of both large-

scale bureaucracies and centralized and hierarchical organizations.

Once again, the railway industry was at the origin of the first major

professional executive body. The 1880s and 1890s saw the construc-

tion of integrated systems in transport companies, with a cartelization

between companies and the support of professional consultants, man-

agers, investors and speculators.

In 1891, the Pennsylvania Railroad employed 110,000 people

against only 39,492 in the U.S. army. Even the United States Postal

Service, the largest civil service organization at the time, only em-

ployed 95,440 people. Two years later, federal tax receipts amounted

to $385 million, while the Pennsylvania Railroad only made $135 mil-

lion of revenue, but its stock market capitalization of $842 million

was to be compared with a federal debt of $155 million.

On the contrary, in Europe, the army and civil services were much

bigger employers than private companies. It followed that most man-

agers and administrators came from the public sector, while in the

United States they originated from private railway companies. Simi-

larly, transportation and communication infrastructures were financed

by the state in Europe and by private investors in the United States.

But, in both cases, companies’ race for expansion and production

bureaucratization was to take another step forward just before the end

of the century.



Mergers and Acquisitions: The Era of Trusts

On the eve of the twentieth century, existing activities entered a phase

of obsolescence because of technological advances and heavy invest-

ment in new and fast-growing industries. Then appeared phenomena

that we would now describe as “macro-economic” but were tellingly

called “general overproduction crises” at the time. These were the first

major economic crises that were not due to undersupply following

bad harvests (classical agricultural crises) but to demand crises re-

sulting from either overproduction or a discrepancy between supply

and demand.

Overcapacity became evident in several sectors during the first

Great Recession (or Depression) of 1873–1896, when newly-born

companies faced natural selection after a period of rapid and uncon-

trolled growth. As unfortunately the euphoria could not last forever,

some companies had to exit, which led to an increasing concentration

in a same sector, that is horizontally this time.

The Second Industrial Revolution was distinguished by a shift to

more capital-intensive production, rapid growth in productivity and

living standards, the formation of large corporate hierarchies, the pro-

gressive accumulation of overcapacity, and eventually, closure of fa-

cilities.

Although attempts were made to eliminate overcapacity through

the creation of trade associations and cartels, not until the 1890s’

mergers and acquisitions boom was the problem substantially re-

solved.19 The production capacities of merged companies were re-

duced substantially through internal restructuring and the liquidation

of unprofitable companies. During the decade from 1895 to 1904,

19. See Alfred Chandler, “The emergence of managerial capitalism,” HarvardBusiness School Case n. 9-384-081, revised by Thomas J. McCraw, 1992, quoted byMichael Jensen, “The Modern Industrial Revolution, Exit, and the Failure of InternalControl Systems,” Journal of Finance, July 1993.



more than 1,800 manufacturing firms merged into 157 consolidated

corporations.20

This movement was partly due to the Great Recession of 1873–

1896.21 As Naomi Lamoreaux underlined, mergers seemed the best

way to deal with the ongoing recession. The solvent demand for goods

dropped because of falling wages and income, while production ca-

pacities increased continuously, which explains the general decline in

prices. They were now generally below costs, especially as the reduc-

tion in the volumes that companies could produce and distribute on

the market resulted in higher unit costs. Business enterprises could no

longer benefit from economies of scale. With such small quantities, it

became harder to amortize fixed costs.

As the market contracted, companies could only find new cus-

tomers by engaging in a price war against their competitors and thus

worsening deflation. The only solution for a firm was to acquire the

clientele of one or several competitors to be able again to amortize its

own fixed costs with larger sales volumes. In other words, it was nec-

essary to acquire rival companies. As these operations took place in

industries where the number of firms had not risen because of the

crisis, they resulted in fewer independent enterprises and widespread

concentration.

The increase of the average size of firms was sped up by the late

century formation of the first trusts and monopolies, during the great

merger wave of 1890–1914. The purpose of these mergers was also to

reduce overcapacity by correcting the prior flood of new products,

markets and industries.

The 1880s mergers resulted in the formation of big trusts in the

oil, whiskey, sugar, lead, cordage and tobacco industries. This move-

ment accelerated from 1890 to the 1920s despite the passage of the

20. Jensen, op. cit., p. 835, quoting among others Naomi Lamoreaux, The GreatMerger Movement in American Business, 1895–1904, Cambridge University Press, 1985,p. 100.

21. Described notably by Touchard and al.



1890 Sherman Antitrust Act. And the development of electricity and

heating distribution systems in the 1920s represented the biggest

breakthrough of large organizations since the introduction of railroads

in the late nineteenth century.

The layoffs and other social consequences of the expansion of big

firms and merger movement explain the existing political turmoil—

the protests against the “Robber Barons” and large-scale capitalism—

and the efforts to deprive businessmen of the chance to gain political

power. Hence, the antitrust laws and the typical U.S. restriction of

banks’ role in industry.

On the contrary, there were no such concerns in Europe where

state bureaucracies were numerous and big private companies still

rare. Big trusts were less of a threat given they generally had much

less influence than on the other side of the Atlantic. And when they

did, they usually cooperated with large state bureaucracies in the same

“clubby” atmosphere of connivance that would characterize corpora-

tist systems later on.

Finally, the modern companies, born in the early nineteenth cen-

tury during the First Industrial Revolution, turned into industrial gi-

ants during the Second Industrial Revolution of the late nineteenth

century and their role was not analyzed in economic literature before

the 1930s, in particular in the work of Berle and Means, Schumpeter,

Galbraith and Chandler.22 All these authors have stressed central role

of size and the general trend towards expansion in these big organi-

zations. A crucial factor that mainstream economists did not recognize

precisely because business concentration had become so common and

omnipresent in the twentieth century, but also because they focused

on the price mechanism in perfectly competitive markets.

22. Adolf A. Berle and Gardiner C. Means, The Modern Corporation and PrivateProperty, McMillan, 1932, Joseph A. Schumpeter, Capitalism, Socialism and Democ-racy, Harper and Row, 1942, but also Edward H. Chamberlin, The Theory of Monop-olistic Competition, Harvard University Press, 1932, Joan Robinson, The Economics ofImperfect Competition, McMillan, 1933 and more especially Ronald Coase, The Natureof the Firm, Economica, 1937, and Alfred Chandler, The Visible Hand, op.cit.



The development of the industrial giants was made possible by

the use and significant improvement of the administrative techniques

previously used by states only.

Yet, at the time, states were also moving towards gigantism. It was

the Age of Imperialism, described by Lenin in Imperialism: The Highest

Stage of Capitalism, and it lasted until the end of World War II. But,

contrary to what Lenin upheld, political imperialism does not result

of an economic need for new markets. All social organizations,

whether public or private, simultaneously tended towards gigantism

from the late nineteenth century to the second half—or rather the last

third—of the twentieth century. World War I was not caused by un-

bridled capitalism but rather by the rise and expansion of state struc-

tures.

IMPERIALISM AND STATISM

During this first twentieth century, the discreet state of the nineteenth

century became imperialist outside the country and dirigiste within.

Admittedly, there had already been large states or empires in the past.

Their population was smaller in absolute terms than that of the twen-

tieth century empires because the world population itself was much

lower before the Industrial Revolution. Yet, a few empires like the

Roman or Chinese empires gathered a very large proportion of the

world population at their time.

Imperialism reemerged worldwide at the end of the nineteenth

century, sustained this time by the extraordinary technical advances

of the two industrial revolutions which were much greater than those

that had promoted navigation and military conquest in the sixteenth

century.

The External Growth of States: Imperialism

While the first wave of imperialism had resulted in the creation of

trading posts and fortified towns and various kinds of pillage rather



than direct colonization or permanent administration of large coun-

tries by the Europeans (except in South America, where the Spanish

empire could exploit militarily and pillage vast mineral resources, as

the populations were very small), the second wave of colonization saw

a new occupational mode by large foreign civilian populations devel-

oping new economic activity and benefiting not only from advanced

military techniques but also from more efficient agricultural and in-

dustrial production techniques and improved methods of administra-

tive management and communication.

The former remotely controlled colonies were quite independent

thanks to the long distance and the difficult communication. The

home country had little control over the colony. On the contrary,

twentieth century colonies were directly connected to their home

countries by rapid air transports, by the telegraph, the phone and the

radio.

With economic and administrative advances, European nations

now expanded into world empires through migration of their popu-

lation rather than only by pillage and the creation of trading posts. It

is that new capacity of wealth creation and the centralized manage-

ment of the “home country” that enabled such an intense outward

expansion of European nations.

This imperialism, the outward expansion of states, was also ac-

companied by intense inward expansion, a proof of their improved

efficiency in the management of people and things. Within the initial

geographical dimension of the nation-state, the proportion of the na-

tional product managed by the state increased constantly. The state

itself became a huge firm whose dimensions competed again with

those of large expanding businesses. In the twentieth century, the state

regained its status of largest organization in the country which it had

almost lost during the expansion of the late nineteenth century giant

businesses. The new century was marked by an omnipresent reminder

of the state’s new big dimensions and was a time of statism, dirigisme

and public centralized planning.



E. J. Hobsbawm entitled his book devoted to that period The Age

of Empire, 1875–1914.23 Admittedly, that move was not totally new

for the states: we mentioned above the Portuguese and Spanish em-

pires set up in the sixteenth century. But in the nineteenth century,

they became generally widespread and European occupation intensi-

fied. The great powers shared out the world and successfully managed

their colonies, now partly inhabited by their own citizens who con-

trolled and supervised local economic activities with their own ad-

ministrative methods. The states succeeded in managing larger pop-

ulations. At their apex in 1939, European empires’ population reached

respectively 485 million inhabitants for the United Kingdom (includ-

ing 388 million in India), 71 million for France, 70 for the Nether-

lands, 14 for Italy, and 10 for both Belgium and Portugal.

Touchard et al. canned the 1870–1939 period as “the colonial era”:

“In 1870, Europe was caught in expansionist fever.” As Jules Ferry

stated in 1890: “From 1815 to 1850, Europe was unadventurous and

stayed at home. Today, we annex entire continents.”

The Western conquest ended in 1890 in the United States, si-

multaneously with the Eastern conquest in Russia and the sharing out

of Africa and Asia between Europeans. While colonization had been

criticized until 1914 in France (the press in particular condemned it

until 1890), it gradually gave way to expansionary nationalism. From

1870 to 1939, Europeans drew a new map of the world.

The second international wave of colonization largely outstripped

the first, which had begun with the rise of the states in the mid-

fifteenth century and reached its climax in the mid-seventeenth cen-

tury. Albert Bergesen and Ronald Schoenberg drew a telling chart

presenting the total number of colonies from 1415 to the late ’60s.24

After a double peak between 1640 and 1700, the rate plummeted dur-

ing the whole eighteenth century and most of the nineteenth century,

23. See Weinfeld and Nicholson, 1987.24. “Long Waves of Colonial Expansion and Contraction, 1415–1969,” in Albert

Bergesen (ed.), Studies of the Modern World-System, Academic Press, 1980.



despite brief spells of colonization, and eventually surged to the high

of the 1930s, between the lows of 1880 and 1945. The late nineteenth

and the first half of the twentieth century were the most intense per-

iods of colonization in modern times. And indeed, by 1900, there

remained only forty-six independent states in the world, all the other

countries being under various forms of external control.

Those two waves of colonialism correspond precisely, and quite

logically, to periods of restricted international trade. At that time,

trade concentrated within the empires and involved mainly the home

countries and their colonies. Conversely, free trade re-emerged at

times of low colonization, which coincided with the disappearance of

mercantilist regulations and state-controlled trade. It was the case in

the early nineteenth century after the Napoleonic wars and until 1870.

It is also true of the current globalization period, started in the wake

of the decolonization wave after World War II.

Wars also tended to coincide with these great waves of concen-

tration of the population of nations: they were particularly frequent

when the first colonial wave was at its height, from the second half

of the seventeenth century to 1820. Then, a long period of peace

accompanies the first decolonization and free trade period from 1820

until the end of the century. And we know what conflagrations ac-

companied the intense colonization of the twentieth century.

This is no mere coincidence. As states extend their control areas,

risks of inter-state conflicts increase. In the colonizing race for the

conquest of the world, the rivalry between nation-states (soon to be-

come European empires) were exacerbated. The outward expansion

of states reached its limits as the world was not infinite. Now expan-

sion was inevitably carried out to the detriment of another state or

empire. In game-theory terms, the outward expansion became a zero-

sum game, as a state could only profit from another state’s loss. In-

ternational territorial conflicts thus became much more bitter.

And the correlation with free trade can also be explained easily.

International trade was either indiscriminate or preferential, that is



with all willing partners or only with the colonies being controlled

within some kind of imperial “common market.” The larger the em-

pire, the greater the variety of resources available within that vast

internal common market and the smaller the need to trade with third-

party countries. The home country interest groups could thus impose

mercantilism and abandon free trade more easily, and at a lower cost.

Conversely, each time colonization faded the home countries only had

access to their small and less-diversified domestic market, and they

found renewed interest in trading with other partners: free trade was

better accepted, when more necessary. The economic needs of a coun-

try determine its policy.

Disrupting international non-imperial trade, World War I

strengthened the British and French empires. The relationship be-

tween home countries and colonies intensified during the inter-war

period. The Great Depression of the 1930s was used as a pretext to

return to mercantilism and imperial preference.

Indeed, the trend towards the concentration of the overall pop-

ulation of independent nations has been continuous since the last

quarter of the nineteenth century despite the collapse and disintegra-

tion of the Central Empires following World War I. The gradual con-

centration of this “nation-states industry” resulted in the formation

of two cartels of states after World War II and the suppression of the

Axis nations as independent players. Both cartels fought a final duel,

known as the East-West “duopoly” of the Cold War—this term being

exaggerated given that a full political integration of both superpowers

and all their respective allies, whether colonies or protectorates, had

never been seriously considered. A cartel is not a fully integrated single

firm. Thus a dual cartel is not exactly a duopoly.

The Internal Growth of States: Statism, Dirigisme and Corporatism

States’ growth was not only external and geographical. Their dimen-

sion also increased within their frontiers through higher tax receipts



and the provision of a wide range of new services, new political in-

terventions, regulation of private trade or production of goods and

services in place of private firms. Technically, most of these goods and

services were still private as they could be manufactured and sold by

private businesses. But the state’s new economic and administrative

capacities enabled it to supplant smaller-sized business companies, just

like small- and medium-sized private businesses had been replaced by

large trusts or giant companies. These new large-scale management

capacities explain why twentieth-century states developed a new range

of redistribution activities and intervened as a manufacturer or reg-

ulator in all economic and social activities.

In other words, the state’s greater involvement in the social and

economic life of its country parallels its outward expansion. It is thus

unlikely that the increased internal role of the state results solely from

the independent development of dirigiste, corporatist or socialist ide-

ologies. If such was the case, it would also imply that the doctrines of

dirigisme, socialism and corporatism tend to advocate imperialism

and colonialism. Indeed this is what we observe but there is no the-

oretical rationale for this relation, and initially the socialist ideology

opposed nationalism and imperialism.

On the contrary, the organizational approach easily explains that

if the state’s efficient dimension increases significantly, this has both

international (increased colonialism and imperialism) and domestic

consequences (the state, as a growing organization, uses a larger pro-

portion of the country’s resources: it employs more civil servants and

increases its production of public services). Internal and external

growth can be pursued simultaneously if there is enough available

geographic free space at the frontier or they become substitutes when

one of the two expansion modes (international or national) becomes

impossible because of specific barriers.

And logically, if public organizations’ dimension increases, so

should private organizations’, that is firms. This is exactly what all the

ideologies of the first twentieth century advocated despite all their



other differences: as dirigisme was thought to be more efficient to

control large-sized than small-sized enterprises, it favored big “na-

tional champions” over small- and medium-sized companies. Cor-

poratism organizes the collusion of big private firms gathered together

in professional cartels, with the state being one of the country’s biggest

firms. Finally, socialism simply favors the nationalization of private

enterprises to integrate them into the vast capitalist monopoly that

the state is.

These different ideologies share the belief in the virtue of large-

scale organizations. This belief is in all likelihood the common basis

of their various ideologies, while it is unlikely that they developed

under the influence of independent determinants leading by happen-

stance to the same preference for large bureaucracies.

CULTURE AND THE MORAL ATMOSPHERE OFHIERARCHICAL SOCIETIES

Since the beginning of the twentieth century, large hierarchies had

existed in all developed societies and spread to the others through

colonialism. As these societies’ organizational structure changed, the

relations between the individuals that composed them also evolved

and these new social institutions gave birth to a new culture.

The surprising and yet unexplained evolutions observed during

the twentieth century (for instance, the burgeoning of ideologies and

totalitarian regimes) resulted in fact from universal organizational

transformations.

Each type of organization calls for specific behaviors, specific re-

lations between the individuals that constitute its culture. It is almost

sure that the culture of Ancient Egypt would not have met the needs

nor adapted itself to the environment of the Amazonian tribal socie-

ties, the Inuit of the Arctic or the sixteenth century French society,

and vice-versa. The type of organization depends on the technique

used and different techniques call for different cultures. This is es-



pecially true when it comes to information transmission modes. For

instance, mail, literature, cinema, telephone and television determine

different cultures. The same is true of horses, sailboats, cars or su-

personic jets. A society’s culture depends on its social organization.

To be effective, the triumphant bureaucracy of the first twentieth

century needed an appropriate culture that it gradually generated: im-

personal file processing, forms, formalized procedures, hierarchical

relations. These features are incomprehensible to New Guinean abo-

rigines or to Amazonian Yanomamo tribes not because they are in-

tellectually unable to grasp the complexity of these methods but be-

cause these methods have no social function in their lives.

The main peculiarity of the bureaucratic culture lies in the at-

omization of individuals by the hierarchy to isolate them from their

fellows and thus impose on them an almost exclusive vertical relation

with their superiors. Once they are thus deprived from all personal

relations and left with no other social institution to relate to other

than the hierarchy which employs them, this culture must also create

rules for structuring their private life. Totalizing ideologies thus sup-

plant horizontal social relations, introducing subordination and su-

pervision in all the aspects of individuals’ lives, whether private or

political, both aspects that gradually merge.

Those specificities contribute to depersonalizing individuals so

much that they can be treated in a hardly human (or humanist) way

and even in an inhuman way. As they are merely a number lost in

an anonymous crowd, the psychological cost to the bureaucrats of

inflicting inhuman or criminal treatments on standardized and de-

humanized individuals are significantly lowered.

The bureaucratic culture of the first twentieth century thus ac-

counts for the state’s criminality and explains why mass murders and

crimes against humanity were so common at the time.



From Organization to Culture

The individuals and organizations which compose a society must

comply with broadly accepted rules of behavior, institutions without

which living among large human groups would be impossible. The

bouts of anarchy seen here and there obviously show that, in such

conditions, all human activities become difficult and often impossible,

so that order—even in its most oppressive form—is often preferred

to anarchy because it allows a prosperity which would otherwise be

impossible, as Mancur Olson underlines. Undoubtedly, this is one of

the reasons behind the stability of autocratic regimes, which look un-

bearable to the fortunate people living in civilized democratic coun-

tries but which the people concerned most probably prefer to the

other typically anarchic alternatives.25

Thus, almost no human society is totally deprived of institutions,

especially the most informal, custom and tradition.

The institutions which we tend to consider as “things” (organi-

zational charts, jobs or buildings) are in fact only sets of rules defining

the acceptable terms of interaction between individuals belonging to

the same group.

In the contemporary world, these rules are most often written,

but they can also be customary, written in the people’s memory and

transmitted through precedents.

Private and public contracts, the internal rules and regulations of

companies, universities or administrations, states’ political constitu-

tions, the Geneva Convention relative to the Treatment of POWs are

all institutions. Business and labor law institutions define the relations

within and between companies. Civil law institutions define the re-

lations within families, among others. Political institutions define the

relations between the individuals and the various interest groups

within the state organization. Thus, a constitution defines all the po-

25. This view is developed by Gordon Tullock in Autocracy, Kluwer, 1987.



litical rules and how power should be exercised, be it democratic or

dictatorial, presidential or parliamentary.

It is only by convenience that the Constitutional Council and the

European Court of Justice are referred to as institutions while they

are only bodies in charge of enforcing institutions. Like other econ-

omists such as Douglass North, we distinguish the institutions (the

rules of behavior) from the bodies which implement them or which

they are ruled by.26

Institutions and customs are part of a society’s culture. And cus-

toms can be considered as non-written institutions conveyed through

precedents and enforced by the exclusion of any individual who does

not comply with the usually codified behaviors from the group, par-

tially or totally.

The notion of culture is often exclusively understood from an

educational and literary point of view because our modern civilization

has been dominated by written texts. But to a larger extent, it rep-

resents all the knowledge acquired that enables the members of a

society to communicate, notably by developing the common tastes

and judgments (preferences and values) that will then frame and de-

termine individual behaviors. There are thus classical music, pop, sci-

entific, political, literary or movie cultures which represent as many

open social groups that individuals can freely join or support.

But there are also business cultures each encompassing predefined

rules and behaviors, specific knowledge, past experiences and a savoir-

faire peculiar to a given production organization. They play an essen-

tial role in promoting and accelerating communications which is ab-

solutely necessary for good teamwork.

Thus, organizational advances are accompanied by cultural trans-

formations, a phenomenon which is particularly obvious in the busi-

26. “Institutions are the rules of the game in a society, or, more formally, thehumanly devised constraints that shape human interactions” quoted from DouglasNorth in Institutions, Institutional Change and Economic Performance, Cambridge Uni-versity Press, 1990, p.3.



ness world at times of mergers and acquisitions. When transforma-

tions are broad and affect all the organizations of a society, it is

understandable that they can alter its whole culture.

The common evolution undergone by all organizations in the first

twentieth century, a move towards a large size that was accompanied

by the development of the hierarchical superstructures necessary to

manage them, changed the usual or “dominant” type of organiza-

tion—dominant in a purely statistical sense, which means the most

commonly observed. Large hierarchies soon dominated modern so-

cieties and replaced smaller structures as well as non-exclusively ver-

tical interpersonal relationships.

And large hierarchies gave a new twist to human relationships

and the moral and intellectual conceptions which limit and govern

them, making them quite different from those seen in poorly hierar-

chized societies or those suitable to the good functioning of markets.

Indeed, the hierarchical relation—the essence of hierarchy—con-

sists in the subordination of most of the organization’s members to

the decisions and directives of only a few, their immediate and higher

level superiors, and so on until the company head who stands alone

at the top of the pyramid. This implies that subordinates voluntarily

submit to the executives and leaders, who in turn control them

through monitoring and coercion measures so that they follow faith-

fully the orders and directives given by the company head.

As a result, there are two diametrically opposite cultures: the mar-

ket culture which relies on individuals’ initiative and diversity and on

the non-exclusive bilateral relationships from equal to equal, and the

hierarchical culture which requires standardized individuals who sub-

mit to the leader’s will as part of asymmetric and exclusive bilateral

relationships.



Endogenous Cultures

Most studies on culture work on the assumption that the ideas and

other representations of culture are arbitrary: “there’s no point ar-

guing about taste” (De gustibus non disputandum est). The members

of a society would thus be collectively responsible for their overall

culture, whose characteristics would be both discretionary (that is,

inexplicable) and transmissible, thus forming the “people’s spirit.” Al-

though the latter concept is mostly discredited nowadays, it still in-

fluences a number of pseudo-sophisticated analyses.

Wondering about the lasting differences between culinary cul-

tures, Paul Krugman puts forward the hypothesis that French

traditions stem from the astounding variety and quality of local prod-

ucts. It would explain why France’s gastronomic taste is by no means

comparable to that of quickly urbanizing England which suffered from

relative poor food supply during the Industrial Revolution.27 The ex-

isting transportation and refrigeration techniques did not allow to

supply the crowded big cities with high-quality fresh products. And

so ordinary people, and even the middle classes, were forced into a

cuisine based on canned goods, preserved meats and root vegetables

that did not need refrigeration (as potatoes for instance). According

to Krugman, urban Britons got so used to eating low-quality food that

they could no longer tell the difference. When better products became

available, the taste inherited from several centuries of bad food per-

sisted. Only very slowly did their taste improve and come closer to

the French taste. Gastronomic culture is thus endogenous.

In the economic literature, Schumpeter is among the very few who

does not consider culture as an arbitrary assumption. In Capitalism,

Socialism and Democracy, he explains that the “civilization of capital-

ism” declined because of the very nature of that system, and more

precisely the gradual bureaucratization of big firms where individualist

27. Paul Krugman, “Supply, Demand, and English Food,” Fortune, July 20, 1998.



entrepreneurs were replaced with private bureaucrats, thus undermin-

ing the social foundations upon which the system was based.

This is one of the most telling examples of an endogenous con-

ception of culture. It is the production methods and social structures

that generate a certain culture, which meets best their specific needs

and “reflects” the material conditions of the society. We recognize

here the materialist theory of general political and cultural superstruc-

tures developed by Marx.

But the confrontation of the two modern organizational modes

used by Marx and Schumpeter—capitalism and socialism—does not

really explain the cultural differences observed between the first and

the second twentieth century. As underlined by Niskanen, the culture

of a very large U.S. firm such as Ford or General Motors is not fun-

damentally different from that of the Department of Defense or the

State Department, which itself is not very different from that of the

Ministry of Industry or the Planning Ministry in a Communist coun-

try.

In fact, if capitalism is defined as the intensive use of capital

equipment (especially machines) and the conversion (the “capitali-

zation”) of the future revenues of an investment to their current value,

then Schumpeter does not predict the demise of capitalism when he

mentions the bureaucratization of very large firms and the disappear-

ance of individualist entrepreneurs. What he really describes is the

decline of individualist entrepreneurs and how they were supplanted

by large hierarchies and how, as a consequence, the market culture

was replaced by the bureaucratic culture. In other words, what Schum-

peter explains is the decline of one kind of capitalism, or how market

capitalism was replaced by “hierarchical capitalism.”28

As this transformation was merely due to the almost unavoidable

changes in mentality that it generates, capitalism as such did not dis-

28. This expression is notably used by John H. Dunning in Governments, Glob-alization, and International Business, Oxford University Press, 1997.



appear. What occurred in the twentieth century was rather the con-

vergence of a hierarchical capitalism towards an also bureaucratic so-

cialism because of the universal organizational mutations which led

to the replacement of market mechanisms by large hierarchies. And,

as a consequence, the market civilization was supplanted by the hi-

erarchical civilization.

Depending on whether markets or hierarchies are the prevailing

mode of organization and coordination of production and exchanges

within a society, one of the two cultures will have a predominant

impact on the individual behaviors it will shape, and which will even-

tually influence more or less all the aspects of social life other than

working relations. Thus, the market and hierarchical cultures spread

from work to all the other aspects of social life. This will determine,

through the unity of individual behavior, the overall culture of the

society.

The invention of the factory is a telling example of the radical

social and cultural changes that organizational transformations can

generate. Originally, farmers and craftsmen worked part-time in rural

societies attached to well-established old traditions, but with the First

and Second Industrial Revolutions, they moved to large cities where

traditions were often non-existent and were yet to be established.

These periods also saw the establishment of a very strict discipline,

especially regarding the timing of work inside factories and firms. As

a result, individuals’ freedom to manage their work and organize their

personal time was substantially reduced. There was great reluctance

to comply with these new constraints.

Obviously, the way work is organized depends on the size of the

organization and the society’s degree of concentration: work is not

carried out the same way in a ten-person workshop as in a ten-thou-

sand-person firm. The regrouping of a large number of individuals

favors their anonymity. In such conditions, it is easier to be a “free-

rider” (that is to refuse to pay a fee for a service), cheat or even

commit crimes since culprits are difficult to identify and thus to pun-



ish. As the probability for a cheater to be caught and punished de-

creases with the number of people gathered together, the gain ex-

pected from such a behavior increases proportionately. That is why

these kinds of behavior are more common in great cities than in small

villages where everybody is acquainted with one another, and also in

large firms rather than in craft workshops where everybody knows

exactly what his neighbor does.

A fundamental problem in large-scale organizations is thus to su-

pervise the productive performance of each of their members. But

their big dimension also affects the degree of cooperation or collusion

between the organizations. As we will underline later on, this explains

the characteristics of the organizational culture and the moral atmos-

phere in hierarchical societies.

the race for size, 1870–1960 - hoover institution · tions, thus giving birth to giants like...

Documents